While the October insurance renewal season saw premiums increase across the board, also noticeable was a rise in mergers and acquisitions, especially in the small/medium firm sector.
Despite warnings of a hardening insurance market in recent months, under 50 firms entered the extended policy period at the end of September. Unfortunately, firms that were unable to obtain an insurance quotation by that time would likely be in the process of closing down and/ or in the cessation period.
Motivation to merge:
Small and medium firms undertaking perceived higher risk areas of work have typically felt the effects of the new economic environment far more than their larger counterparts. Some small firms have experienced a 'perfect storm' of pressures, including recessionary burdens on fees, increased regulatory demands, more claims, and resultant increases in PII premium from a shrinking pool of insurers willing to cover smaller firms.
Running a firm of any size also means that there is a certain critical mass involved where investment in systems and processes, training, and compliance enables firms to operate efficiently while fulfilling their administrative and compliance requirements. We often see a benefit of a merger combines two systems and processes into one allowing a growth in fee earning staff.
For many smaller firms, mergers provide access to additional workstreams, allowing for a more diverse spread of work across the business. This can help to reduce reliance on solely residential conveyancing or personal injury claims work to generate work in progress or immediate cashflow.
The advent of Alternative Business Structures (ABS) and the incentive of partnering services or external investment may also prove attractive for some. However, there are downsides to this. Notably, the recent case of Kingly Solicitors saw the 16-office law firm consolidator intervened by the SRA and placed into liquidation, owing creditors nearly £17m.
Why did this happen? In time we may know the answer, and we can begin to understand the lessons we can take from this. The regulator might start to look at the ABS model in more detail, and what an outside investor can change to an established law firm structure and the investment within. This is not an easy solution considering the restrictions around solicitors' accounts.
Until death do us part?
The last spate of mergers some years ago were followed by a significant wave of 'divorces'. The question on many people's lips is whether the current merger mania is going to have a similar fallout. Whether you are a firm looking to expand by acquiring struggling practices, or you are looking for another firm to snap you up – the rules are the same:
Don't act hastily
There is also the question of timing. You should consider whether the merge needs to occur straight away, or whether it is better to wait for a set date (your next PII renewal date, for example). This would allow time to organise the merger, so it can come into effect with fewer risks
Look beyond the advertising fluff
Is your chosen partner what they seem? It's worth doing your due diligence to make sure. Start by looking at your potential partner's claims and complaints, as well as their finances. That way you can feel confident about the partnership you are entering
Assess your compatibility
Do your skill-sets, strengths and culture complement each other? This is an important consideration for any partnership
Will it be a long-distance relationship?
Will that be a strength or a source of problems?
Have you met the whole family?
Once you've done your due diligence, you might decide you'd like to take on a particular team rather than merging with the whole firm
Once you've decided on the right match, insurance is a consideration that should be factored in early. Contact your broker at the initial planning stages to get advice on key issues, such as whether you are best taking on the liabilities of the other firm, or for it to go into run-off.
Your broker should also be able to provide you with some indications on the impact of your premium, and your market attractiveness in insurance terms, should the merger go ahead.